Desmond Ng

MPOC Shanghai Representative Office, Malaysia

Introduction

Import of palm oil in China has witnessed a stagnating or rather downtrend in recent years after it climbed to its peak of 6.34 million MT in 2012. The import volume basically was hovering between 5.00 and 6.00 million MT after that, with exceptional of 2016 where import dropped below 4.50 million MT due to global shortage of CPO output (Figure 1). Many would ponder why palm oil being the most produced and price competitive vegetable oil was unable to increase its sales in the country that has huge population and strong growing economy?

Figure 1. Import of palm oil in China (2011-2017)

If we dwell down further into the types of palm products imported by China in past several years, we could see that the import of major palm fraction, RBD Palm Olein (RBD PL) was the palm fraction that led to the overall drop of palm oil import in China (Table 1). On the other hand, demand for RBD Palm Stearin (RBD PS)has seen steady rise in the past few years (and again 2016 was exceptional).

This could be attributed to 2 factors. Firstly, being a daily necessity, the demand for oils & fats is closely associated to the economy situation in a country. This could be seen from the strong association of the GDP growth against the oils & fats demand growth annually in China (Figure 2).

Figure 2. GDP versus oils & fats demand growth in China

After the Asian Financial Crisis hit the world economy,China’s economy was not spared from this disaster and has slowed down from its glorious double-digit GDP growth to single-digit since 2011 and dropped rapidly to less than 7% since 2015. This situation which is coined as “New Normal” by the Chinese government of course led to the relook of economic situation in the country and various reforms policies being outlined and executed to revive it.

Nevertheless, the drop in GDP growth has had direct impact on the oils & fats demand as majority of this commodity is mainly used in industrial applications, be it food or non-food sector. The annual growth of oils & fats consumption was below 500,000 MT when the GDP growth dropped below 7% in past 3 years. As such, this has somehow impacted the demand for RBD Palm Olein which is also mainly used in various food processing sectors.

The other more imminent factor that has contributed to the drop of RBD Palm Olein’s import was the competition from other major vegetable oils, primarily soybean oil(SBO). Of course, other vegetable oils such as rapeseed oil and sunflower oil though not directly competing for the same applications with RBD Palm Olein, the surge in output or import which brought down their prices would cause a shift in the demand equation of various types of oils & fats.

Although palm oil is unique and superior in many applications, some other applications could be easily substituted with other vegetable oil especially soybean oil as long as the cost is right. Which means, there is this group of food manufacturers that are very sensitive to price of vegetable oils and would willing to switch to other oils in order to achieve lower cost of production.

Furthermore, applications of RBD Palm Olein is restricted by its physical properties which is unable to withstand cold weather and start solidifying once the surrounding temperature drop below 10℃. This required it to be fractionated further to get the liquid fraction with melting points at 18C, 15℃, 10℃ etc. depends on which part and which time the oil needs to be used. Nevertheless,this will involve additional cost to which an estimated RMB 300-800/MT is required to process it into these desired fractions. In another word, the competitiveness of RBD Palm Olein has to be discounted by RMB 300-800/MT in certain regions and period of year. This solidifying property also limits the use of RBD Palm Olein in consumer pack cooking oil as it will be solid or semisolid if its content is beyond certain percentage and hence almost non-existent in consumer cooking oil market.

Price discount vs demand / import

As mentioned earlier, the prices of RBD Palm Olein and soybean oil dictate some manufacturers in deciding which oil to use for their production. Hence, when compared the discount of RBD Palm Olein’s market price against soybean oil in China and the import & demand of this palm fraction, it is clearly shown that it is strongly association between these variables (Figure 3).

Figure 3. Discount of RBD PL against SBO vis-à-vis import & demand

Further analysis on the correlation between the discount of RBD PL price against SBO and demand,as well as discount and import of this fraction arrived at 0.8657 and 0.9293 respectively, which means these variables are positively associated. In another word, the lower the discount of RBD PL against SBO, demand and import of RBD PL will be lower until a point where the demand is irreplaceable or is the basic or inelastic demand, where the applications are unable to use other oils than RBD PL to achieve the desired output.

So what is the factor behind causing the narrowing price discount of RBD PL against soybean oil in these past several years? Simply, the increase in soybean oil supplies in China.

Increasing soybean import and crushing

It is well known by the industry that the production or output of CPO has surpassed soybean oil since 2005 and become the most produced oil globally, where its output was higher than soybean oil by 26% in 2017. Hence,theoretically that the palm products should remain very price competitive against soybean oil. Nevertheless, it is a different story at all when we narrow the market place situation into just China alone.

Since the open-door policy being implemented, Chinese government was aware that the country will attract huge amount of foreign capital to participate in its booming market potential under the huge population. This will translate into big demand for various commodities including meats. In seeing the huge demand potential for feeds to grow various livestocks for its products, Chinese government encourages the setting up of crushing plants to produce more meals as the main source of protein for animal feeds. This has led to fast growing crushing capacity and driven the import of soybean from the G3 countries (US, Brazil and Argentina) since then.

Figure 4. Soybean crushing capacity and import

Table 2. Major crusher and capacities in 2016 & 2017(‘000 MT/day)

Subsequently, the ever growing appetite for oilmeals,primary soybean meal (SBM) has resulted in China being the biggest soybean importing country with 95.53 million MT being imported and accounted for 64.1% of soybean traded globally in 2017. With the 86.3 million MT of soybean being crushed in 2017, this is being converted to 67.3 million MT of soybean meal and 15.3 million MT of soybean oil. These outputs were growing at an annual compounding rate of 8.3% (SBM) and 9.5% (SBO)respectively between 2008 and 2017. In contrary, the demand for oils & fats only registered a compounded annual growth rate (CAGR) of 2.78% during this period.This means soybean oil production has outgrown the total demand of oils & fats in China and this has resulted in some market share of other oils including RBD PL being taken over by SBO.

Figure 5 clearly showed that the market share of oils derived from the imported oilseeds (mainly soybean) has grown from 30.6% to 46.8% in the span of 10 years’ time.On the other hand, market share of oils & fats supplied through processing local oilseeds and animal fats dropped from 39.6% to 29.1%. The encroachment of market share by imported oilseeds has also ate into the share of imported oils by 5.7 percentage points in 10 years’ time.

Figure 5. Share of various mode of supply for oils & fats in China

With the Chinese government abolishing the restriction of foreign investment in oilseeds and oils & fats industry since 28 July 2017, more foreign and local companies are putting additional crushing capacity to crush soybean in years to come, where according to China National Grains& Oils Information Centre, soybean crushing capacity is forecasted to reach 530,000 MT/day or 174.9 million MT by 2020. And if bases on its capacity utilization rate of around 60%, this means there would be 104.94 million MT of soybean crushed and produces 83.95 million MT of SBM and 18.89 million MT of SBO. In another word,the SBO output will grow at an average rate of 7.2% from 2018 to 2020. If the total demand of oils & fats does not pick the same pace in these 3 years, there is very high possibility of further encroachment of SBO into other oils & fats’ market share. However, this is still very much depends on the demand for animal feed in China in years to come.

Animal feed industry

After witnessing the exponential growth of animal feed production in China prior to 2012 to as high as 11.49% per annum, animal feed production slowed down in subsequent years only grew at an average rate of 0.58% between 2013 and 2017 (Figure 6). The slowdown signifies the demand for animal feed has becoming more stable which was due to the stable demand of livestock products especially for meat. Despite the speeding up of urbanization process in China taking place in past several years under the current leadership in China, there is a shift to more healthy diet by cutting down meat consumption.

Of course, we should not ignore the fact that there was huge relocation exercise taken place in 2017, where 31 Dec 2017 was the due date given to the breeder to close or relocate some of their unfit livestock farms to the regions being identified and supported by government. One of the policy announced by MOA in August 2017 was a plan to promote the development of large-scale, concentrated animal feed operations in North East China. The report titled, “Accelerating the Development of Modern Animal Husbandry in the Main Grain Producing Areas of North Eastern China” outlined a program of incentives to facilitate China’s largest swine breeders, farrowing, and feeding operations to relocate to the North East China corn belt as well as new market entrants to invest in a growing industry.

China is the world’s largest swine producer and pork consumer. At least eight listed companies have announced or confirmed plans to produce around 17.0 million swines annually in coming years in North East China.Many more companies including the country’s biggest pork producer, Wen’s Foodstuff Group, as well as major feed millers like Haida, are building farms in North East China. Many swine breeders have established operations in North East China. The rebuilding of the industry in North East China will further consolidate the industry and lead to a more vertically integrated approach to feed use, further raising feed efficiency. On the other hand,environmental permitting policies are also driving the industry to relocate.

Figure 6. Animal feed production in China

Being the major ingredient used in feed formulation,and with number of swine breeding being the largest among all the livestock in China, approximately 40% of the SBM being utilised for formulating swine feed, while both egg-laying and meat poultries jointly accounted 44.5% of SBM utilized in China (Figure 7).

Figure 7. Breakdown of SBM usage in animal feeds production (2017)

As highlighted earlier, animal feed production has gone on a rather slow growth in past several years but why SBM consumption has increased at an average rate of 8% while overall animal feed production only increased by 0.58% annually between 2013 and 2017? This could be attributed to the regulations highlighted earlier where various tough environmental directives were being issued by the Chinese government to all the livestock farms since 2014 and given a due date until end of 2017 to fully implemented.

This saw thousands of small livestock farms especially swine farms which were unable to meet the requirements being closed down. At the same time, major players saw the opportunities of dwindling supplies of meat from those small farms and put up more modern and organized farms to take advantage of this changes. Subsequently,more oilmeals especially SBM were being included in animal feed production (Figure 8) since 2014 due to increased demand for formulated and concentrated feed by modern farms.

Besides that, the issuance of anti-dumping duty on DDGS (Distillers’ Dried Grains with or without Soluble)since 2016 has also led to the drop in DDGS’s import in China and created more opportunities for SBM to satisfy the demand for protein in animal feed.

Table 3. Import of DDGS in China (‘000 MT)

Figure 8. Inclusion rate of oilmeals and SBM in animal feeds

However, once again we can see that oilmeals inclusion rate in animal feed has reached its peak in 2017, while the inclusion of SBM in particular has also touched 35%in 2017, a level of inclusion that is unusually high, as common inclusion rate of SBM in swine or poultry feeds is between 20% and 30%. Hence, there is a sign that the inclusion of SBM in animal feed has reached it maximum level. With this assumption, then the demand for SBM or oilmeals in general will be largely depends on the animal feed production, which in turn rely on the demand for animal products.

Conclusion

Based on the report entitled “China Agriculture Outlook (2017-2026)” released by the Ministry of Agriculture of China last year, the ministry has projected that the growth of meat production will only be at a rate of 1.2 to 2.0% annually from 2017 to 2026. If such projection is materialized in the years to come, which has high possibilities based on the arguments that the change of dietary habit highlighted earlier, then the demand for animal feed will be growing at the similar rate, which will be the same for SBM as well.

As such, for 2018, the demand for oilmeals and SBM in particular is expected to see a maximum 2%or additional 1.36 Mn. MT of SBM being consumed in China. This will also at the same time led to an increase of at least 306,800 MT of SBO assuming China sources all its SBM through internal crushing of imported soybean.Hence, the country is expected to at least import an additional 3.6 million MT of soybean to supplement the increasing needs of SBM. This in which will lead to the total import of soybean reaching 98.9 Mn. MT which is very close to the 100 Mn. MT forecasted by many in the industry.

With SBO supply being projected to increase by approximately 306,800 MT in 2018 due to the increase of soybean crushing, this will once again taking up the majority growth of the oils & fats demand at an estimated 500,000 MT as China is targeted its economy to grow at 6.5% in 2018. As such, this may be another tough year for palm oil, specifically RBD PL to increase its demand in China, unless Chinese government retaliate against the US which slapped heavy duties on selected Chinese goods by doing the same on some US goods including soybean.

Nevertheless, this is unlikely a scenario to take place.If China imposes hefty import duty on US soybean, the Chinese crushers have to turn to Brazil and Argentina to source the shortfall resulted from this exercise. However,the soybean production in both South American countries this year was either at par (Brazil) or dropped significantly (Argentina) against volume recorded last year.The imposition of high import duty for US soybean may subsequently resulted in the rise of SBO and SBM prices,which would be transferred to high cost for livestock products and subsequently inflation in China. Hence, unless there is huge disruption on soybean supplies globally in 2018, the market potential for additional uptake of RBD PL as compared to last year would be relative low.